Stock Market Investing for Beginners
How Anyone Can Have a Wealthy Retirement by Ignoring Much of the Standard Advice and Without Wasting Time or Getting Scammed
By Richard Stooker
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Copyright © 2012 by Richard Stooker and Gold Egg Investing LLC.
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DISCLAIMER
I am not a broker.
I am not a licensed securities dealer or representative of any kind.
I am no legal right to sell you securities and I’m not trying to do so.
Nothing in this book is to be construed as a solicitation or offer to sell you securities.
Nothing in this book is to be construed as personal financial advice.
I have no legal right to give you personal financial advice. Even if I was a registered financial adviser, which I’m not, I don’t know you or your individual financial situation.
This book is the result of my research and is believed accurate. It consists of my opinions and suggestions.
I’m not making any representations as to how much money you will make if you invest according to the guidelines I set forth —that will depend upon the payouts of dividends and interest of the precise securities you decide to invest in, and nobody can predict the future.
That is part of the problem with mainstream financial advice — it assumes the future will repeat the past. It doesn’t.
Past performance is not indicative of future results.
This book is for education and entertainment. Nothing in this book is to be construed as professional advice. For that, you should consult your attorney, accountant or financial adviser.
I am not responsible for the results of your investment decisions.
You must read, think over what I say, make your own investment decisions and take responsibility for your own life, including the results of your investment decisions.
Continuing to read this book implies your acceptance of these terms.
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Table of Contents
Chapter 2 What are Corporations
Chapter 3 What is a Stock Exchange
Chapter 4 What is Beating the Market
Chapter 5 What is Your Investing Horizon
Chapter 6 What are Your Investing Goals
Chapter 9 Be Grateful for Bear Markets
Chapter 10 What is an Initial Public Offering
Chapter 11 What Happens at a Stock Exchange
Chapter 12 Stock Speculation and the Economy
Chapter 15 Ways to Invest in Stocks
Chapter 16 How to Invest in Stocks
Chapter 17 What are Dividend Re-Investment Plans
Chapter 18 Basic Financial Statements
Chapter 19 Why Stock Prices Go Up and Down
Chapter 20 What Determines the Market Value of Stocks
Chapter 21 How to Determine the True Value of Stocks
Chapter 22 What is Value Investing
Chapter 23 The Efficient Market Theory
Chapter 24 What are Stock Market Indexes
Chapter 25 What is Diversification
Chapter 26 Who is Beating the Market
Chapter 27 Protect Your Money From Scams and Useless Expenses
Chapter 28 Stock Market Investing and Taxes
Chapter 29 How to Invest Your Time for the Greatest Investing Return
Chapter 30 – Investing for Capital Gains or Income?
Chapter 31 Final Recommendations
Chapter 32 Additional Stock Market Investing Resources
My goals:
1. Get you started in the stock market and headed toward to a wealthy retirement
2. Show you how to avoid wasting time and money
3. Keep it short and easy to read
I know a lot of people are ignorant about how the stock market can benefit them. I see the questions they ask on Yahoo Answers, LinkedIn and in the comments section of a video I posted on YouTube explaining the stock market.
There's a lot of misinformation being spread about the stock market. A lot of it comes from the major media outlets and writers. A lot of websites and bloggers spread confusion along with good insights.
Plus, a lot of people seem to think all there is to succeeding in the stock market is to learn THE technique or the formula, and all they need to do is ask and someone will tell them.
My aim is to give you the knowledge not just to buy a few shares of stock, but to start building a personal fortune without making the many mistakes I have.
I will warn you -- some of my opinions are NOT mainstream investing advice.
For example: many financial writers want you to believe it takes a lot of time, money, and effort to invest in stocks.
Not true.
There is a key fact about stock market investing (backed up by Nobel Prize winners in Economics and commonly accepted by financial academics, and such industry giants as John Bogle who founded Vanguard) that I alone (that I know of) take to its logical extreme.
That's good news because it means you don't have to learn a bunch of formulas, how to analyze company books, how to read charts, hang on in investing forums online, buy trading software or anything else like that.
Heck, you don't even have to read The Wall Street Journal.
That's all a waste of your time.
I spent nearly 20 years trying to get rich quick. I read countless books on how to choose winning stocks. I went to seminars. I bought programs.
I once bought a stock one day and saw it go up 60% the next day. Nice one, but why? I didn't know, so it wasn't useful. I once tried to get rich with covered calls. They're considered extremely "conservative," but the stock I bought sank so low I still lost money. I once put on a United States Treasuries bond option trade with a 90% success rate. Thanks to a meltdown by the Russian Stock Exchange, I lost all my money.
My B.S. Accounting degree helped me understand the basics of what I was doing, it was no help when it came to actually making money.
Then one day my mother asked me to organize her financial records. She showed me the notebook containing a list of the stocks my grandfather bought for her with the insurance money she received from my father's premature death in an automobile accident.
That happened in 1955, yet my mother still had that notebook. She never threw anything away :)
Looking at it, I realized my grandfather had chosen a well-rounded portfolio of stocks that paid dividends.
Many of them had been sold over the years, or bought up, but others were still sending my mother substantial quarterly dividend checks: Hershey, Wrigley, AT&T and its descendants, Ralston Purina, and others.
Those investments enabled my mother to raise two small children -- myself and my sister. And after we grew up and began supporting ourselves, it allowed her to live well in comfort.
And it struck me -- dividends were the key.
So I'm telling you upfront investing for income is my prejudice.
However, I'm not forcing you to believe me -- and since you're a beginner, at this point you may not have a strong opinion, but just be wondering, because doesn't everybody else in the world just "assume" that "investing" in the stock market means buying some stock and then selling it -- hopefully for a profit?
Yes, that's what most people think, without ever examining it.
Heck, you may not even know what dividends are. The modern mainstream financial press pretty much ignores them or treats them as unimportant.
And if I don't convert you to investing for income, that's all right.
I know the optimal way to investing for higher stock prices, and I'll explain that to you too.
The best part is, investing the way I advise is easy and simple.
A lot of people make it sound hard and complicated. They want you to study graphs, read company annual reports, and run countless spreadsheets to analyze company numbers -- or spend hours a day online talking to other people who do the same thing.
There's no evidence any of that is useful.
In fact, there's tons of evidence -- research studies going back decades -- it doesn't work.
I'll tell you the REAL "secret" to making more money, and how you should therefore spend your extra time to make more money from investing.
Let's start at the beginning --
What is stock?
What is Stock?
A share of stock is a unit of ownership of a corporation.
This may seem a little odd or too simple, but at root that's all it is.
Example:
As of February 2011, Microsoft had about 8.4 billion shares outstanding.
Bill Gates owns about 591 million shares, making him a 7% owner.
He is the largest single owner. I'm sure other important Microsoft executives also own big chunks. The rest is owned by the general public -- that's you and me.
If you buy 100 shares of Microsoft stock, you are a 100/8,400,000,000th (or 1/84,000,000th) owner of one of the largest companies on Earth.
You're not going to catch up with Gates, at least not with Microsoft stock :)
You may not feel like much of an "owner" of thee company because you have no practical control over what Microsoft does (you don't even qualify for a discount on Microsoft Office), but legally that's exactly what you are, and it has some potentially important legal and financial implications for you.
This Book is About Common Stock
Shares of stock ownership in a company are known as "common" stock, and that's the subject of this book.
There is such a thing as "preferred" stock, but it's different, and not the subject of this book.
Whenever you hear people bragging about selling stock for a profit, or the New York Stock Exchange, or their stockbroker, or the Dow Jones Industrial Average, they're referring to common stock.
Common Stock Ownership Means:
1. You become a part owner in the company, in proportion to how many shares you own.
2. If the company's Board of Directors declares a payment of dividends, you will receive the same per-share payment as every other common stock owner.
3. You have the right to attend annual stockholder meetings and to vote on proposed changes and on who is on the board of directors.
You get one vote per share of stock you own.
So you do have a say-so in how Microsoft is run, but at 100 shares it's a lot smaller than Bill Gates'.
4. If the company goes out of business, you have the right to receive whatever is left over after its legal debts and the lawyers are paid, in proportion to how many shares you own.
So, in summary a share of common stock is a unit of ownership in a corporation.
But what is a corporation?
What is a Corporation?
A corporation is company recognized by the government as an entity from any person.
Its existence can continue indefinitely.
It can carry on business. Assuming it makes a profit, it owes taxes and must pay them.
Why Have Corporations:
1. Because the corporation is a separate entity, it can continue doing business despite all changes in people.
Coca-Cola didn't die with Asa Candler. McDonalds didn't die with Ray Kroc. Disney didn't die with Walt.
2. They can raise money from investors who get to share in the profits without doing any work.
Most companies are started by one or a group of people who are not (yet) fabulously wealthy. They need more money to expand their company, so they sell a part of its ownership to the stock market.
3. Limited liability
This is very important. Nobody would buy shares of stock if they thought they could be personally sued for what the corporation does.
There are thousands of companies listed on American stock exchanges. They are engaged in many kinds of businesses. They are legally obligated to make as much money as possible.
Sometimes they bend the rules. Sometimes they break the law.
Sometimes they think they're obeying the law, but the government thinks otherwise.
The vast majority of companies do the best they can to keep employees and customers safe and happy, but accidents happen.
And lawyers need to support their families.
So, sometimes rightly and sometimes wrongly, companies get sued.
Sometimes they win in court and sometimes they lose.
No matter how much money a company is ordered to pay, nobody will ever ask you -- although you're one of the owners -- to pay anything out of your pocket.
To the extent the company loses cash because of a lawsuit, you the owner of 100 shares are disadvantaged, but nobody can ever ask you to pay extra.
In contrast, think about what would happen if you owned a store, and somebody slipped and died from hitting their head on the floor and you didn't have insurance.
Do you think that person's family would sue you for every dime you own?
You better believe it.
And if you had any partners, the family's lawyers would also sue them even if they had nothing to do with the store's floor.
When you own stock, the worst that can happen is the company goes out of business and you lose the entire amount you paid for the stock.
That's not a happy situation, but it beats losing your home and retirement savings because a minimum wage employee forgot to put out a "Wet Floor" sign when they mopped a floor.
One of the signs carried by Occupy Wall Street protestors is:
"Corporations are Not People."
True.
Corporations are Collections of People
It should be obvious, but while corporations are NOT people, they ARE made up of people.
Corporations have employees. From the janitor to the Chief Executive Officer (CEO), they all work for the corporation. It's easy for upper management (which has most of the power) to forget the corporation is an entity separate from them, but it's legally true.
Corporations also have owners. Everybody who owns at least one share of stock is a part owner of the corporation.
Corporations also have a Board of Directors which are supposed to represent the interests of shareholders, and therefore make sure management is doing its job.
Upper management and Boards of Directors are supposed to run the corporation so it makes as much money as possible. This is a legal obligation they have to the shareholders.
(Remember, the CEO -- although the big boss in charge of everything -- is technically just the hired help, while stockholders are the owners. But most CEOs also own a lot of shares of stock.)
Of course, because everybody concerned is a human being, there can be -- and often are -- differences in opinion as to what is best for the corporation.
It's easy for investors and stock market analysts and commentators to forget this but, because they're made up of people, over time corporations do change.
If you're young you may find this difficult to believe, but in the 1960s and 1970s IBM was the most respected corporation in the United States. Unless you're a techie, may you not have even heard of IBM.
Some companies are old. Coca-Cola started around 1919. Obviously, the people who launched it are all gone. It's the "same" corporation on paper. It still owns the secret formula. It still sells soft drinks. But in many ways it's changed a lot. And it's had its ups and downs.
No matter how hard companies try to pass along the "old ways" of doing things, sooner or later the older generation retires and new people move up, bringing new ways of doing things which may be better -- or worse -- or some of both.
So corporations are separate entities owned by people who have the right to buy and sell the corporation's stock.
Which happens through a stock exchange.
What is a stock exchange?
A stock exchange is simply where the buying and selling of shares of stock is organized.
Back in 1693 England's stockbrokers hung out in coffee houses along Exchange Alley. By 1698 a broker named John Castaing was regularly posting lists of stock prices in Jonathan's Coffee House. That was the beginning of the London Stock Exchange.
A hundred years later, on May 17, 1792, 24 stockbrokers signed an agreement under a buttonwood tree outside 68 Wall Street in lower Manhattan. That was the beginning of the New York Stock Exchange.
On the floor of the exchange, traders buy and sell shares of stocks based on the orders they receive from stockbrokers.
It's in the format of a continuous auction.
Buyers negotiate with sellers to reach a price they can both accept.
Let's say you tell your broker to buy you a "round lot" (100 shares) of Microsoft. (Any number of shares less than 100 is an "odd lot.")
Because that's a small amount, your order is grouped with other customers, and they send an order to a representative on the floor of the New York Stock Exchange.
Through what looks like confused shouting, that person finds someone who is selling Microsoft. They negotiate on the price.
If that seems rather quaint, inefficient and . . . old-fashioned (not to mention 20th century) you're right.
In 1971 the National Association of Securities Dealers started the NASDAQ computerized exchange, though at that time it was basically a computer bulletin board. Now NASDAQ is the second largest stock exchange in the world (behind the New York Stock Exchange), and it's still all-electronic.
Eventually the New York Stock Exchange will be all electronic as well, but nobody knows when.
For us, it doesn't matter. Both systems work.
The New York Stock Exchange is now owned by Euronext, a company formed from four European stock exchanges merging, so you may see it referred to as Euronex: New York. But for now, for most people in the US, it's still the New York Stock Exchange.
Most countries of the world now have at least one stock exchange. It's a sign of being modern.
Many beginners have the ambition to beat the stock market. Or think they have to beat it to make money from stocks. Let's think about what exactly that means.
What Does It Mean to Beat the Stock Market?
This book does not promise to teach you how to beat the market for many reasons, which will be clearer by the time you finish.
However, it is a concern of many investors. And many new investors ask how they can do it.
What does that even mean?
Officially, to beat the market you must have a portfolio of stock shares which rise in price more than the market as a whole, on a risk-adjusted basis, and in the long run.
That "risk-adjusted basis" is an important qualification.
There are stocks which can be "high flyers." Given a good market, they'll go up a lot more than the market.
Yet in a bad market, they often fall even lower than the market.
Heck, you can take all your money to a casino, find a roulette table and bet it all on one number.
Sure you'll probably lose it all. But if 100 people do it, two to four will win and get paid $35 for every dollar they bet.
100 people do the same thing. Several of them win big while everybody else loses. Can we say the winners "beat" the roulette wheel -- or just were the lucky ones?
That's the nature of risk. You can win big, but you'll more likely lose.
And beating the market for real means doing it in the long run.
In any given year roughly half the money managers in the world will beat the market. Most of them will underperform the market next year.
Flipping a coin and getting heads two or three times in a row does not make you a skillful coin flipper.
Fortunately, it's not necessary to beat the market.
It is necessary for you to be clear on what's called your investment horizon or timeline.
What is Your Investing Horizon?
A lot of investing books and financial advisors make a big deal out of what's called your investing "horizon."
That comes down to, how long to you plan to keep your money invested?
In some ways it's an important question, but in another way it isn't.
Some people's "horizon" is ten minutes -- certainly under one day.
Those are day traders. All their trades are short-term. They close out all their stock positions when they shut down for the day.
Other people are speculators who hope to make a profit from a stock within a week or several months.
Others are willing to hold stocks for a few years before they sell for a profit.
True "investors" are building wealth for the long-term, to fund their retirements or to leave their families a large estate. They are looking ahead twenty, thirty, fifty or even more years.
This can make a big difference.
A stock of a promising company can appear to have a great future for the next several years -- but be going downhill today because of some bad news about a product launch.
The day trader is selling while the several years speculator is buying.
Sometimes you will hear people talk or write about how there are two sides to every trade, and only one is right.
But this really isn't true. The day trader selling a stock they sees going downhill today may be just as glad to get out before it goes down further as the several years speculator is glad to pick up the stock at a low price today so they can sell it at a higher profit (they believe) in two years.
Both buyer and seller can be happy, and meet their trading goals, if they have different horizons.
So what is your investing horizon?
That depends on your investment goals.
What are Your Investment Goals?